If Culture is the key to Digitalization, what examples are out there to learn from? I have selected 5 companies for the sake of their diverse backgrounds and business models, their undoubted success and the fact that culture appears to be the centerpiece of their success.
Xiamoi (“little Rice”) is the world’s 4th largest telecom manufacturer, although it was founded only in 2010. Besides Uber, it is the world most valued privately held company. Xiaomi is not a Chinese clone of Apple. It differs fundamentally:
It is more software than a hardware company. Xiaomi’s roots are in providing a version of the operating systems for google’s Android phones which surpassed the performance of google’s original version
It targets the Mid-market target in the emerging markets, the biggest market in the world, while still providing phones with aspiring designs, complete functions, and especially very high reliability
The prime sales channel is eCommerce, with a large chunk through their own run web store: Xamoi’s website is the 3rd largest commerce site in China. The only secondary importance of traditional brick and mortar stores is an essential element of Xamoi’s ability to scale fast and globalize
This is going to be complex and abstract. Business people are not sociologists – but effective managers seeking a digital transformation need to understand the sociology of their business culture or be so focused on the singular topic to allow for digitilization to succeed.
Corporate culture is the sum of all values, world views and observed behaviors of people inside a company.
This sounds rather harmless. Lets have a look at how culture can be observed, loosely based on MIT professors Ed Scheins definition of cultural layers:
You see what a monster culture truly is. It is everything that really counts for an employee. It is not just feelings and office furnitures, it is pure power, it is wealth, it is frustration and it is reward.
Focus on the targets that really matter, speed, decisions taken under vast uncertainty, agility to try and fail fast until a breakthrough has been achieved, decisiveness and execution excellence – these are all requirements on the design of companies work organizations in the digital revolution. These qualities can’t be brought into existence by hierarchical command & control. They need to be designed into an organization.
All three forces described above create a demand on companies to create new work organizations, let’s recap first:
Data itself is useless. It is the act that follows the interpretation of data is important. This is nothing new and has nothing to do with the digital revolution. Individuals or companies that fail to use all data at their disposal are underachieving.
Over the ages, people have always invented techniques to make data “actionable”. One prime example invented in the 12th century by Italian merchants is double entry book keeping, which is still the basis for all accounting today. The sheer amount of financial transactions threatened to overwhelm merchants. They were loosing the transparency of their business, they lost track were their business was heading. Double entry book keeping changed that and continues to do that today.
Customer is king. And has been king ever since flint stone merchants competed for customers. Except for monopolistic market situations, the customer has always been in the centre of corporate moves. In the digital revolution the customer has neither been suddenly rediscovered nor was a successful entrepreneur in need of a reminder by business consultants promoting a new management fashion.
What has changed is communication technology so that a company is now enabled…
to communicate much more efficiently with the customer, at a lower cost per customer transaction.
to know the customer much better than ever before, if data can be captured and utilized.
to utilize this know-how to find a better problem-solution fit, sooner and more often.
to communicate differently with the customer, in different forms, in different contexts and at different times or situations.
Lets dive into each of those three factors one after the other.
Transformation is the art of changing something from status A to status B, given a significantly big scale of change. In an enterprise context single projects would not be seen as delivering “change” but not “transformation”, but a group of interconnected projects bundled in a program would usually be expected to result in “transformation”. There is no clear border that separates “change” from “transformation”, but anyone in possession of wisdom and humility would only make scarce use of the label “transformation”.
The object of a business transformation is a company. A company can be broken down – using a simplified version of McKinsey’s 7S Framework – in people, organization, processes and systems. An important view of the company, as all 4 aspects will be transformed by digitalization.
Digitalization itself can be broken down into 5 forces:
Use of Information Technology
More empowered work organizations
A set of cultural values (more or less derived from silicon valleys famous frontrunners)
What separates traditional transformation from digital transformation is the importance attached to these 5 forces of digitalization. These forces are mutually interconnected and grow in strength by acting together. They act like a perfect storm, causing the business revolution which has been hyped in internet bubble until 2001 and which is finally here to stay.
The five forces of digitalization come in such a combination and strength, that existing business models are destroyed and new ones are created. These forces change the competitive position a company is in. A company will likely go into decline with competitors overtaking them, if failing to transform into something new.
A “competitive position” is – according to corporate strategy guru Michael E. Porter Michael E. Porter – determined by 5 competitive forces: Threat of new market entries, buyer power, threat of product substitution, supplier power and competitive rivalry with other companies. If any of these “competitive forces” change in strength or direction, a company needs to react.
Porters 5 competitive forces have been around basically since people have been trading flint stones. What is really new is that the IT revolution has now reached such a scale to impact culture massively. This can be measured by market capitalization of companies created the last 20 years vs. the “old economy”, the ubiquitous nature of IT in everyones daily life and last not least the broad public acceptance of the existence of an IT revolution even by not technology minded people.
The accepted game changer in competitive strategy is now the use of IT technology, but not in its bare form, e.g. “lets replace paper”, but in the form of “Digitalization”. And “Digitalization” in turn is nothing else than a combination of the 5 Digitalization forces listed. Forces which have been unleashed by a revolution in Information Technology are now revolutionizing work organizations and cultural values – not only in companies, but in human culture overall.
Lets have a look at the five forces of digitalization of businesses one after the other – starting with the “root” force: Information Technology.
Is Digitalization real? Of course IT is present everywhere in our daily lives, everywhere globally. But how big of a deal is it? Lets answer this by looking at market evaluations of still privately held tech start-ups compared to the old economy.
Lets start with Uber, the ride sharing app. Uber has been worth about 51 Billion Dollars at the end of July 2015. That is a very steep price for a ride sharing app. Stock valuations have been hyped before and bubble may burst. Is Uber’s valuation just an outlier, not representative for the digital revolution? Lets have a look at the most valuable privately held companies in January 2015:
Uber is still big, but there are newer companies with already massive valuations. Who has heard of Xaomi? Xamoi (translated into english “little Rice”) is a chinese mobile phone manufacturer how is an excellent example of digitalization – a case studied in an upcoming post. While Uber may still be overrated, there are others to fill the place. And Uber does not appear too overrated when compared to public tech companies by December 2014.
After all, Uber is aiming to be the company claiming the lead position in the transportation market. Similar to amazon, which is the place to go for shopping, Uber is poised to be the place to go for transportation needs – globally.
But all tech stocks may be overvalued. After all, in an era of near 0% interest rates all this cheap money is inflating assest evaluation. But this money is inflating the value of the “old economy” too. Already at the end of 2014 Uber has been worth more than 72% of the worlds most valued companies (the Fortune 500). These include household names such as Kraft, Hertz, Halliburton, KKR, Hilton etc.
In July 2014 50% of the top 10 most valued US companies are tech companies. Not over-hyped companies like possibly Uber, but companies that are here to stay: Apple, Microsoft, Google, Facebook and Amazon. The smallest of them, Amazon, has been valued at nearly 248 Billion $ in July 2014 and is at the time i write this (28th October) valued at 285 Billion $ (click here for current valuation of Amazon). The old economy, even “old” tech companies like Intel or Oracle, are left in the dust.
The absolute height of the market capitalization is likely to be a bubble. Even the relative evaluation of tech companies vs. others is likely in for a correction. But given the track history of tech companies over the last 20 years and the just unfolding potential of information technology, we are looking at single companies been thrown back into obscurity, but the “new economy” is here to stay.
Not only the size of market capitalization points towards the existence of a digital revolution. According to Innosquare, the lifespan of a Standard & Poor 500 Company measured by the time listed in the S&P 500 Index went down from 61 years in 1958 to 18 years in 2013. At the current rate, all S&P companies will be replaced by new ones in 2027. Most of these vanishing companies leave the S&P 500 Index as they are bought through Mergers and Acquisition (see “The mortality of companies“, a 2015 study). This however is likely to be more correlated to the massive modern financial markets, cheap money and capitalisms incentives towards ever more Mergers & Acquisitions. But without deploying digitalization as a tool to increase market capitalization, a company will rather sooner than later fall prey to a takeover.
So what’s in for a traditional company? Digital transformation obviously offers tremendous potential for growth and profit. But after all, digital is a tool and – according to Bill Gates: “A fool with a tool is still a fool”. Key is to learn why, how and when to use these tools in an orchestrated manner. Alas, this is what this blog is all about.
So much noise about the digital business revolution! Looking for the signal in all that noise? This blog tries to separate hyperbole from facts.
Digitalization is creating a business environment of super competition. Conventional organizational models fail – established corporations can’t match the speed and therefore the success of their digital competitors. These days success depends more and more on businesses having a strong, customer centric digital DNA embedded in company practices and cultures. But what exactly should the organization transform to? And even if this target is clear, how should a company manage its transformation? These are two main questions of our decade, if not the main questions, corporations are puzzled about, irrespective of sector or geography.
If you are interested in these questions, this blog is for you. I will attempt to shed some light on what I perceive to be key challenges, concepts and approaches to digital transformation. The subject is big, so let me try to map out the journey in three way points:
First, lets have a look on why digital transformation is different from business transformation in previous decades.
Then I will focus on these differences first, their challenge to established business practice and hints how to tackle them.
Finally we will going to work towards a cohesive, holistic framework to digital business transformation by adapting or revolutionizing current business transformation practices.
And of course: It is quite a personal take, a mashup on digital transformation. But I will build it on empirical evidence, a hoard of well accepted best practices and on accepted academic theories or business practioneer views, mentioning and collecting sources for you to refer to along the way. Truth is an elusive thing, so get engaged and slam my views by commenting: Hypothesis and Falsification is still the way to enhance knowledge!
My personal views are – for good or bad – influenced by my background and values. Let me shortly elaborate on this so that you know where i am coming from:
I studied economics in Germany and Scotland and hold a university degree in economics.
Specialized in empirical organizational theory during my studies and stayed with this pet subject ever since.
Had a strong exposure to IT as I started my career doing global ERP implementations and ventured into the start-up sphere building platforms and market places.
Spend 15 years in consulting all over the world, mainly as a program manager for major transformation projects of international clients within automotive, manufacturing, telecom and retail.
Have been a managing director for the last 5 years for a mid sized (about 920 MEuro) fashion retailer.
As i focused so long on business transformation, the one constant over the whole period, I am subject to use the jargon of a manager and a consultant. Should you find yourself a victim of that just write a comment and I will try to explain and correct.
Hope you find the content useful and the journey entertaining!